Sanctions are a driving factor for Bitcoin adoption

Original title: SANCTIONS AS A DRIVER OF BITCOIN ADOPTION

Author: SHINOBI

Source: Bitcoinmagazine

Compiled by: WebX Labs

summary:

Sanctions are a pure motivation for countries to seek currency alternatives that a country cannot use against them.

In the last few years of Bitcoin’s existence, the dominant narrative circulating in the ecosystem has been that of “digital scarcity” and “sound money.” While the narrative of censorship-resistant payments has not gone away, in my opinion, the properties of “digital gold” and “digital scarcity” have been eclipsed over the past few years. I think this is putting the cart before the horse. It is true that in a world of ever-inflating money, scarcity is extremely important, as evidenced by the investment dynamics of real estate, stocks, and other types of assets that can actually grow faster than inflation. If you have a fair amount of wealth, it makes sense to expose yourself to these assets, as not doing so would mean a continued decline in purchasing power. But what is the underlying underpinning of this speculation? Utility value. Real estate is valuable because people live in their homes, run businesses, and mine resources. Stocks are valuable either directly through dividends or indirectly through growth-related appreciation in value, where investors are able to share in the profits of successful economic endeavors. While there is a speculative component in these markets, the underlying value is based on some portion of the market subjectively discovering actual utility value. Without the market’s utility value, speculation in the market is effectively no different than gambling. So what is Bitcoin’s utility value? Censorship-resistant payments.

I think that the feedback loop between speculation and utility value is often overlooked or oversimplified in the context of Bitcoin’s narrative. In other words, the balance of different narratives becomes unbalanced, ignoring the reality that underpins Bitcoin’s utility value, which is censorship-resistant payments. This is the utilitarian basis for Bitcoin speculation. So how does this dynamic play out from a geopolitical perspective?

Sanctions

Sanctions are one of the most important tools the United States has to force people around the world to comply with its political demands. This can take many forms, such as diplomatic sanctions to sever political ties, military sanctions to impose strategic military strikes or arms embargoes, or even bizarrely, to prevent sporting events with the sanctioned country. But the most effective and damaging form of sanctions is economic sanctions. This can take the form of blocking the import/export of specific goods or services, or in the most extreme cases, completely restricting all trade or commerce involving the targeted entity. Economic sanctions can target entire countries (witness the United States' restriction of all trade with Cuba), a sector of the economy, specific private or public companies, or even individuals.

They are often used by individual countries and the United Nations as a means to achieve specific foreign policy goals, or to protect their national security interests (or the interests of their allies) around the world. Prime examples are the tough sanctions against Iran’s uranium enrichment program, Mexico where drug smuggling is rampant, and Russia’s actions in Ukraine over the past decade. Each of these examples of sanctions is a direct result of a country or entities under that country’s jurisdiction engaging in activities that the U.S. government explicitly deems to be in conflict with the national interests of that country or its allies. This is a very important component of how the United States (and other nation-states) project power around the world. Trying to exert influence solely through military presence and violent means is politically unwise and economically unsustainable, so other, softer means are a key aspect of being able to maintain that influence.

Bitcoin is a huge potential disruption. Economic sanctions are enforced by controlling the centralized infrastructure of the legacy financial system. When governments say SWIFT can't process transactions involving sanctioned entities, they stop. When governments say MasterCard or VISA can't process transactions, they stop. When governments tell banks to seize someone's money, they do it. Bitcoin is a huge threat to authorities that will dictate what financial infrastructure providers can and can't process, which is at the heart of any sanctions regime.

Now that we are no longer succumbing to the “digital scarcity, digital rise” argument to conceptualize how Bitcoin can grow into the dominant global currency, let’s once again consider a feedback loop where underlying utility value becomes a solid foundation for speculation. If Bitcoin is to become so large and widely used, it will need a healthy proportion of utility-based demand to continually support more speculative liquidity.

Iran, mining and tax evasion

During the Obama administration, 655 Iranians and entities were subject to US sanctions. Towards the end of the Trump administration, that number had risen to 962. Ever since they began their nuclear program, they have been harassed and bullied by the international community at the behest of the US. Although in 2018 the EU decided not to enforce US sanctions on European companies doing legitimate business with Iran, the US still has a lot of influence around the world.

However, in 2019, the Iranian government legalized and regulated cryptocurrency mining in the country, after years of massive miners being attracted to its abundant and cheap gas reserves. Importantly, it involved a licensing program. This was the beginning of a major shift in the Iranian government’s thinking about Bitcoin and cryptocurrencies. Say what you will about the current regime in Iran, the potential for violent conflict, but the reality at the end of the day is that the U.S. government is dictating to a sovereign nation what they are or are not allowed to do to develop their own energy infrastructure, forcing them to comply by financially punishing them. Bitcoin provides them with a way to bypass this coercion. By 2020, things have calmed down, and the large Chinese operation is running smoothly, even with direct ties to multiple Iranian ministries and even the military.

Iran has 17% of the world’s natural gas reserves. In 2011, their annual oil exports were worth nearly $120 billion; in 2019, due to sanctions, that number dropped to less than $10 billion. Given that 80% of their government budget by 2010 came from oil exports, the sanctions have had a huge negative impact on their government budget.

While it is much more difficult to export oil and gas directly, they can still obtain these energy resources and can now monetize them directly through Bitcoin mining. In October 2020, the Central Bank of Iran issued a regulation requiring all licensed Bitcoin miners to sell their Bitcoin to the central bank to pay for imports. This is to deal with the problem of dwindling foreign exchange reserves and maintain a way to bypass sanctions.

The influx of illegal miners in 2021 was used by the government as a scapegoat for problems with the national grid, although it is difficult to determine to what extent this was true, and over a four-month period the government banned mining operations and used the problem as a reason to confiscate mining equipment and shut down unlicensed operations. That same year, the Central Bank of Iran changed its regulations to allow other Iranian financial institutions to pay for imports using Bitcoin and expanded its role in the arrangement to private sector players.

If sanctions are not lifted, then there is a good chance that the Iranian government will continue to expand its role in Bitcoin mining in order to maximize its energy reserves, convert them into Bitcoin, and have a way to pay for imports. How big their role will be and what form it will take is uncertain, but we can see a sign from Venezuela. When they created a licensing system for miners in the country in 2020, one of the requirements for legal mining was to mine using their National Digital Mining Pool, a government-run service. This gives the government full control over all funds generated by Venezuelan miners when they mine new Bitcoin, and gives them complete autonomy in deciding when to pay miners and how much to pay.

According to estimates from an Iranian think tank in March 2021, they estimate the ability to generate $700 million per year from mining if the government “heavily interferes.” This seems to be correct for estimates of around 4.5% of the network hashrate being in Iran around that time period. What does “heavily interfere” mean? Because these numbers mean that 100% of Iran’s hashrate would go directly into the government’s coffers. Does this simply continue to force you to sell your Bitcoin to a government entity if you do so, or does it suggest the possibility of the government outright seizing the hashrate and running it themselves?

Sanctions: A driving force for adoption

The most important property of Bitcoin is that it allows transactions when people don't want you to, which is censorship resistance. This is not just an important property for individuals. It's important for drug dealers or political activists. It's even relevant to entire nation states, and entire populations. Whenever a country imposes sanctions on another country, whether it's against an entire industry or a specific company, it has a knock-on effect for everyone associated with those entities. It blocks revenue for the sanctioned entity itself, that is, if an oil company can't export as much oil as it did before the sanctions, then their profits will take a hit. It affects the people they employ, it affects the contractors they may hire, it affects the companies downstream in the supply chain who buy products from these companies, who are associated with their business activities. It also affects businesses that interact with sanctioned entities, which can't always simply divert their exports to another market and guarantee a percentage of the sales proceeds elsewhere to offset the sales lost by not being allowed to interact with the sanctioned party. This also has a knock-on effect on the supply chain, affecting contractors and employees and so on.

At the end of the day, sanctions are just another facet of the financial system, abused by those in power to coerce and force people to do what they want and punish those who don’t. They are a tool of control and subjugation. And Bitcoin is an escape hatch to get around them, and one that has a real inherent demand. In the Treasury Department’s 2021 Sanctions Review, the Treasury Department highlights the fact that the number of sanctions actions by the Treasury Department increased by 933% from 2001 to 2021. In the review, they touch on many of the shortcomings of current sanctions policy. In particular, they point to the reliance on U.S. allies to cooperate in enforcing sanctions (remember when the EU refused to enforce sanctions on Iran?), the need to limit unintended collateral damage (especially given how long it took the Office of Foreign Assets Control (OFAC) to issue a license to import humanitarian aid in light of the Taliban’s takeover of Afghanistan in 2021), and the increasing use of digital assets to get around sanctions.

The US Treasury is evaluating and realizing that the effectiveness of their sanctions regime is waning, and they are particularly aware of the increasing use of Bitcoin as a tool to bypass sanctions. This will be one of the biggest drivers of adoption by nation states. What would happen if Russia were actually sanctioned by the US for the situation in Ukraine? The “mother of all sanctions” directly targets the largest Russian banks. What if Russia’s connection to SWIFT was cut off? Russia has the largest gas reserves in the world, and already twice as much as Iran (about 10%). Not to mention what happened recently in Ottawa, Canada, where the Canadian government imposed financial sanctions on its own citizens.

This is a true utility-based adoption drive: this isn’t insurance companies making small speculative investments, or companies like Tesla and MicroStrategy making high-risk trades that effectively leverage their companies; this is a real need that can’t be adequately handled with other tools. This will have huge consequences and backlash. Look at Ottawa’s response to the Bitcoin donations received by protesters: the Canadian government “blacklisted” all addresses they observed associated with fundraising, and circulated the list to all exchanges, requiring the seizure of any blacklisted Bitcoin. They even sent a notice to one self-custodial wallet provider (Nunchuk) demanding user information and seizure of funds, prompting Nunchuk to issue a historic response indicating that doing so was not actually possible.

If using Bitcoin to circumvent sanctions from countries like Russia and Iran becomes commonplace, what kind of regulation and restrictions will governments put in place? What will they do if this becomes a parallel channel for international money transfers outside the reach of the U.S. sanctions regime? Either Bitcoin is simply not suited for what it was designed to do — paying for things the authorities don’t want you to pay — or it is. We’ll find out.

Original link: https://bitcoinmagazine.com/business/sanctions-drive-bitcoin-adoption